Sub-prime debt crisis

South Africa will be spared the fallout from the sub-prime debt crisis

Man-in-the-street talk about the possible impact of the United States sub-prime debt crisis on the South African economy - and the South African property market in particular - has been largely uninformed and sometimes dangerously wild, says Ilan Kaplan, Madison Property Fund Managers’ in-house analyst.

“The impression given by some South Africans,” said Kaplan, “is that South African property could follow the US pattern in banks, financial and property stocks and drop by 20% to 30%. In my view this is highly unlikely.”

Only one South African bank, Investec, said Kaplan, had been seriously involved in the purchase of sub-prime packages and their exposure, through Kensington, has already been written off and was limited to £36 million - not an excessive amount for a bank of its size.

South Africa, said Kaplan, had lagged well behind most First World financial institutions in selling large volumes of MBS (Mortgage Backed Securities) into the investment markets, but can now be extremely grateful that this was the case.

“Because traditionally we have been less mature and less aggressive in this respect and because, too, we have always had a tendency to react a few months behind in international finance circles, those governing the South African economy were able to pick up the international warning signs timeously and institute credit restrictions, primarily through the National Credit Act and by raising interest rates. These have limited household debt to a ceiling of 70% of the GDP – significantly less than US and UK levels - and will enable us to avoid the problems that have affected the US and to a lesser extent their First World colleagues.”

The sub-prime debt situation, Kaplan predicted, will take two years to work its way out of the US system but high debts elsewhere – particularly on their balance of payments account – could keep the country in a semi-recessive state for far longer.

“It is interesting,” he said, “to notice that the buying of US long bonds at a rate just below 4% has been very strong of late. This indicates a fairly pessimistic view of the prospects for the US economy, particularly when one realises that those buying are taking a view on the next ten years.”

The good news from the US, said Kaplan, is that the falling dollar is likely to stimulate US exports and therefore help promote a recovery in the economy and especially a decrease in the current account deficit as the US becomes more competitive with its prices. By contrast, he said, the very strong Chinese currency, which has risen on the back of rising exports for some three or four years now, could bring about a slow down in the country’s “runaway train” economy.

Asked how much a general slow down in the world’s economy could impact on South Africa - and the South African property market - Kaplan said that because South Africa’s financial and economic fundamentals are still in place and debt has been contained, it is in a relatively strong position to ride out a two or three year lull period in the international economy. By contrast, he said, the US, although certainly a long way off relinquishing its lead as the world’s dominant economy, will take strain for the foreseeable medium term future.

Article by: Madison Property Fund Managers - www.madisonproperty.co.za